O'Reilly Automotive, Inc. held an earnings call for the second quarter of 2023. During the call, they discussed their results and outlook for the rest of the year and opened up a question-and-answer session. They reminded everyone that their comments contain forward-looking statements and are subject to certain risks. The call was led by Greg Johnson, with Co-Presidents Brad Beckham and Brent Kirby, Chief Financial Officer Jeremy Fletcher, Executive Chairman Greg Henslee, and Executive Vice Chairman David O'Reilly also present.

Team O'Reilly's dedication to providing excellent customer service has driven a 9% increase in comparable store sales and a 16% increase in diluted earnings per share in the second quarter of 2023. This has resulted in a revised full year 2023 EPS guidance of $37.05 to $37.55, representing a 12% increase over the previous year. The team's culture and commitment to investing in their team is credited for the strong performance.

After 41 years of service to the company, the CEO is retiring and Brad Beckham and Brent Kirby will take over his role as Co-Presidents. The succession planning process has been a methodical one and mirrors successful transitions seen in the past. The transition of day-to-day operations will be complete by January 31 and Greg Henslee and David O’Reilly will continue in their roles. The CEO thanked the team for their hard work and results in the first half of 2023.

Brad Beckham congratulated Team O'Reilly on another excellent performance in the second quarter, citing their commitment to customer service as the reason for their successful sales performance. He noted that the business rebounded with the onset of normal spring weather in April and that their results were steady in each month of the quarter. He also reported that the professional business was the outperformer in the quarter, delivering a mid-teens comparable store sales increase.

The company has seen a compounded gain in their business due to their high level of customer service and execution. DIY business has seen steady growth with positive performance in each month of the quarter, and average ticket growth was in the mid-single digits on a combined basis. Same SKU inflation was in line with expectations, and there was a modest benefit from product mix and complexity in the professional business.

The company is increasing its full year comparable store sales guidance to a range of 5% to 7% and total sales guidance to $15.4 billion to $15.7 billion due to the strong performance so far in 2023. However, the company expects to see a decrease in comparable store sales in the second half of the year due to the built-in benefit from same SKU increases and more challenging ticket count comparisons. The company remains motivated to take market share and deliver a high level of customer service.

In the second quarter of 2023, SG&A as a percentage of sales was higher than expected due to initiatives to improve the company's long-term operational strength and accelerate investments in refreshing store image and general maintenance. These initiatives were intended to capitalize on the momentum gained in the business and separate the company from its competition.

The image, appearance and shoppability of stores is important for driving customer satisfaction and share gains. The company has seen good results from increasing team member benefits, but this has been offset by higher-than-expected self-insured auto liability exposure. Payroll and staffing levels are managed with a long-term focus, and the company has prioritized delivering a high level of service to both new and existing customers to prove its value proposition and earn repeat business.

O'Reilly Auto Parts is committed to providing excellent customer service, and they are judiciously managing staffing levels to ensure this. They expect to see an SG&A per store increase of 6% for the remainder of the year, and are committed to expense control and prudently adjusting their operating costs. They expect their full year operating profit margin to be within the range of 19.8-20.3%. Brad thanked the team for their hard work and congratulated them on their performance in the second quarter.

The second quarter gross margin of 51.3% was slightly lower than the previous year, but still within expectations. The company was able to offset pressure from the professional business with improvements in acquisition cost, distribution expenses and shrink results. The industry remains rational and cost and pricing are stable, with some inflationary pressure for suppliers and opportunities to reduce costs for some product categories.

In 2023, pricing in the DIY and professional customer industry has remained rational and there have not been significant changes in market pricing dynamics. The company has been successful in passing increases in product acquisition and other costs through in selling price and has been able to win share at appropriate gross margins. Inventory per store is up 12% from last year and 4% from the beginning of the year, and the AP-to-inventory ratio is 134%, in line with the beginning of the year and slightly better than expectations.

O'Reilly recently opened a 370,000 square foot distribution center in Guadalajara, Mexico, which will have the capacity to service 250 stores in the area. This facility will allow O'Reilly to deploy a larger inventory investment and be more competitive with inventory availability than the competition. The successful opening of the facility was the result of a successful partnership between the U.S. and Mexico teams, and the store teams in Mexico are excited about the opportunities it unlocks.

In the second quarter of 2023, O'Reilly opened 42 stores, bringing the year-to-date total to 100 net new store openings. They are on track to hit their goal of 180 to 190 net new store openings by the end of the year, with new stores in 34 different states, Puerto Rico, and Mexico. Total capital expenditures for the first six months of 2023 were $461 million, and they are on target to hit their capital expenditure guidance range of $750 million to $800 million. Finally, they thanked their team for their hard work and dedication.

The company has a non-qualified deferred comp plan for team members which has a liability for the obligation to pay the value of the deferred compensation in the future. The market value changes in the plan caused a $9 million increase in SG&A expense and a corresponding $9 million year-over-year favorable change in other income and expense. The second quarter effective tax rate was 22.5%, and for the full year of 2023, the company expects an effective tax rate of 22.5%.

The company's effective tax rate for the fourth quarter is expected to be lower due to the tolling of certain tax periods. Free cash flow for the first six months of 2023 was $1.2 billion, and they now expect free cash flow to be between $1.9 billion and $2.2 billion for 2023. The adjusted debt to EBITDA ratio is 1.92 times, and they have repurchased 2.2 million shares at an average price of $855.22 for a total investment of $1.9 billion. They view their buyback program as an effective way of returning excess capital to shareholders.

O'Reilly is experiencing an acceleration in market share, which is attributed to the PPI initiative from a year ago. Brad Beckham attributes this success to the team's culture, the stabilization of the team after the COVID hangover, and their commitment to providing great service from their stores, distribution teams, and corporate offices.

Brad and his team in the field have done an outstanding job of making sure they are positioned to provide the highest level of service in the industry. They are investing more in stores to improve the experience, with service being part of that.

Jeremy Fletcher states that the company has had a culture of expense control for a long period of time and has been focused on getting a return on the money they are spending. He also states that they have given clear expectations for 2023 and that they will continue to find opportunities to invest in their business aggressively when it is appropriate.

Brent Kirby discusses the SKU rate of disinflation, which was in the mid-single digits in the quarter and is expected to moderate in the back half of the year. He also talks about the category mix in both Pro and DIY, noting that some of the bigger ticket items have gotten softer with trade out happening in those categories or batteries.

Brent and Greg discussed the company's product offerings, noting that their good, better, and best product categories have seen a trade-up from better to best, but not a trade-down. They credit this to their improved in-stock position in categories such as radiators and break components. Additionally, they have seen strength in their proprietary brands, which make up over half of their sales. Finally, when asked about the difference between national accounts and up-and-down-the-street business, they indicated that there is no pricing differential.

Brad Beckham explains how the company's business has grown from humble beginnings in the center part of the country to a sizable book of strategic account business that includes both national players and regional players. He notes that the company still has a gap in its footprint in the upper mid-Atlantic and New York markets, but they are seeing consistent growth in all areas of their business from small shops to large independents to strategic accounts. He does not quantify the exact split between strategic and other business, but emphasizes that the independent garage is the foundation of their professional business.

Jeremy Fletcher explains that gross margin seasonality has typically been flattish over the years, but that product mix can have an impact on the results. He cautions against expecting the back half of the year to be in the top half of the range, as other factors can influence the results.

Brad Beckham states that O'Reilly does not sell tires, but they do sell parts for cars brought in for service. He mentions that when shops sell a lot of tires, they have more time to inspect and diagnose the car, which leads to more DIFM jobs. He also mentions that when shops don't sell tires, they have more time to spend with customers and diagnose better.

The company has seen resilient and healthy consumer behavior, indicating that customers are still valuing the proposition of keeping their cars on the road. Additionally, the company has seen strength in under car ride control and chassis categories. The accounts payable and inventory levels are expected to stay elevated due to the accelerated sales pace.

Brent Kirby discussed the potential for more benefits on the gross margin front with easing sourcing costs, noting that suppliers are still under cost pressure but Home Depot is in a good position to mitigate this through strategic measures such as multi-sourcing proprietary brands and aggressively looking for the best prices.

Brian Nagel asked Jeremy Fletcher if O'Reilly experienced any weakness in June, to which Fletcher responded that the company was pleased with their results for the month and that the compares were within a tight band. Fletcher also noted that it is difficult to parse out what they are seeing versus what other retailers may be seeing. Kate McShane then asked if there was anything else driving the sequentially lower comp outlook for the second half of the year, to which Fletcher responded that the moderating inflation and challenging ticket count compares were the main drivers.

Brad Beckham of AutoZone discussed the company's performance in the first half of the year and their expectations for the rest of the year. He also addressed the impact of hot weather on their business, noting that it can lead to an increase in immediate failures, but that they need to be cautious due to potential winter failures. He concluded by expressing enthusiasm for the company's performance and the start of July.

Jeremy Fletcher explains that the deferred compensation impact seen in the second quarter is due to the increase in the stock price during the quarter. He clarifies that this does not affect the net income, but it does create noise on the other income and expense line and can make it seem as if SG&A is higher than expected. This impact may continue into the third and fourth quarter, depending on the broader market activity.

Jeremy Fletcher and Mike Baker discussed sales productivity per employee, which reached a record high. Fletcher discussed wages and benefits, which were in line with inflation and expectations, and he noted that investments in team member experience enhancements have been successful. He believes that the strength of the team and the service they provide will help them continue to sustain and improve their sales productivity per employee.

Greg Johnson thanked Seth and the O'Reilly team for their hard work in the first half of 2023 and thanked everyone for joining the call. He concluded the call by looking forward to reporting their third quarter results in October. The operator thanked everyone for participating and ended the call.

This summary was generated with AI and may contain some inaccuracies.